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Lecture 7
DETERMINANTS OF THE
MONEY SUPPLY, AND THE TOOLS
OF CENTRAL BANKS (1)
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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European System of Central Banks
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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European System of Central Banks
• The European System of Central Banks
(ESCB) consists of the European Central
Bank (ECB) and the national central banks of
the EU Member States.
• The activities of the ESCB are carried out in
accordance with the Treaty establishing the
European Community (Treaty) and the Statute
of the European System of Central Banks and
of the European Central Bank (ESCB/ECB
Statute).
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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Governance of the ECB
• The ESCB is governed by the decisionmaking bodies of the ECB.
– The Governing Council of the ECB is responsible
for the formulation of monetary policy,
– the Executive Board is empowered
to implement monetary policy.
• The ECB has recourse to the national central
banks to carry out her operations.
• The ESCB policy operations are executed on
uniform terms and conditions in all Member
States.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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ESCB: Basic tasks
• The basic tasks by the Eurosystem are:
– to define and implement the monetary policy of the
euro area;
– to conduct foreign exchange operations;
– to hold and manage the official foreign reserves of
the Member States; and
– to promote the smooth operation of payment
systems.
• In addition, the Eurosystem contributes to the
prudential supervision of credit institutions and
the stability of the financial system.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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The US Federal Reserve System
• The formal structure of the Federal
Reserve System is characterized by
– a regional decentralization (there are 12
Federal Reserve Banks)
– each Federal Reserve Bank is quasi-public
(partly held by government, partly by
commercial banks in the district).
– all national banks chartered by the Office of
the Comptroller of the Currency have to be
members of the Federal Reserve System.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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The Federal Reserve Bank of New York
• The Federal Reserve Bank of New York has
a special role (through its involvement in the
bond and foreign exchange markets and
through the presence of large commercial
banks).
• The FRBNY is the only US Reserve Bank to
be a member of the Bank for International
Settlements (BIS).
• Its president assumes a chief role in the
system.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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Governance of the Federal Reserve System
• The Fed is headed by a seven-member Board
of Governors, with its influential Chairman
(Alan Greespan), headquartered in
Washington D.C.
• The Board of Governors is actively involved in
monetary policy making.
• All governors are (voting) members of the
Federal Open Market Committee (FOMC).
• In addition there are 12 (of whom 5 voting)
members from district banks in the FOMC.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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Should central banks be independent?
• A cornerstone of the monetary constitution of
the euro area is the independence of the ECB
and of the NCBs (Article 108).
• There are fears that a dependent ECB
– could succumb to financing large budget deficits of
the government.
– could be asked to monetize too much debt, which
would entails an inflationary bias.
• Central banking also requires expertise and
“should not be left to politicians”.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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Should central banks be independent?
• Counterarguments:
– It is undemocratic to have monetary policy
controlled by a non-elected elite group.
– There is no accountability in central
banking, which is a precondition for, and
core element of, democratic legitimacy.
– There is need to coordinate monetary and
fiscal policies.
– The ECB could pursue a policy of selfinterest.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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Principal-agent problem
• There is a typical principal-agent relation between the
Legislature and an independent institution bestowed
with a public function.
• In line with the requirements of Article 113 of the
Treaty, the President of the ECB presents the ECB’s
Annual Report to the European Parliament at its
plenary session.
• This is followed by the adoption of a European
Parliament resolution, which provides a
comprehensive ex post assessment of the ECB’s
activities and policy conduct.
• The Chairman of the Fed reports to the US Congress.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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The objectives of the ESCB
• The primary objective of the ESCB,
as defined in Article 105 of the Treaty,
is to maintain price stability.
• Without prejudice to the primary objective,
the ESCB has to support the general
economic policies in the EU.
• In pursuing its objectives, the ESCB has to act
in accordance with the principle of an open
market economy with free competition,
favoring an efficient allocation of resources.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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The mandates of central banks
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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Reporting requirements of central banks
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main
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